Cash Is King Again

“Cash is the lifeblood of any company.”

Once upon a time, businesses actually took this principle to heart and sought to maintain a healthy cushion of cash.

However, once Greenspan, et al. managed to convince everybody that such thinking was passe, managers made another decision: “Cash is trash.”

Now, though, with credit drying up and conditions deteriorating rapidly, many are (re)learning — the hard way — why prudence is a good thing.

For some firms, that message has probably come too late. In “Moody’s: More Firms Found with Weakest Liquidity,” the Associated Press reveals that the number of companies that now find themselves without an adequate cushion of cash is hitting record levels.

As the credit crunch gripping financial markets has raged over the past year, the number of companies issuing high-risk debt that suffer from very weak liquidity hit a record level last month, Moody’s Investors Service said Tuesday.

The credit rating agency said that for the first time since February 2003, its weakest liquidity rating was assigned to 53 companies, or 11 percent of the 490 companies whose bonds are considered higher risk. The percentage is double the level of June 2007, before the credit crisis erupted.

Companies with weak liquidity have less cash and fewer assets that can quickly be turned into cash, potentially affecting their ability to repay debts and heightening the possibility of default.

More companies are “struggling to maintain their liquidity positions” amid a slowdown in consumer spending and spikes in the costs of commodities such as fuel, New York-based Moody’s said in a news release.

Posted in Categories: Contributor, Economy, External Research, USA.

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